Provinces’ deficits could shrink in coming years despite trade war: report
Under pressure from the U.S. trade war and a slowing economy, Canada’s provinces are all expected to run fiscal deficits this year — but a Conference Board of Canada report predicts those deficits will narrow in the coming years.
The report released Tuesday paints a picture of provinces struggling to balance their books.
Not long after emerging from a pandemic that caused deficits to balloon, Canada’s provinces are now staring down the barrel of a trade war.
Most provinces have put up contingency funds in this year’s budgets to support workers and critical industries through the tariff dispute.
Many are also aligning with the federal government to push forward major infrastructure projects in the coming years, putting pressure on capital spending.
Just as provinces are drawing down their coffers, they’re also bracing for a hit to the economy.
“When we see a slowdown in economic activity, that leads to less job creation, less spending, less incomes and less corporate profits,” said Richard Forbes, principal economist at the Conference Board.
“And these are … major drivers of provincial revenues.”
Also hampering provincial revenues is a slowdown in population growth as Ottawa tamps down on the flow of immigration.
Many provinces are also facing demographic woes due to an aging population and baby boomers exiting the workforce — another drag on income tax revenue. A growing number of retirees also drives up demand for health-care spending.
Forbes said that with the federal government’s new immigration caps, population growth is likely to hit a wall in the coming years. That would limit any relief newcomers offer the labour market as older Canadians exit the workforce.
The Conference Board report cites the example of Newfoundland and Labrador, which it says is expected to see its population shrink by 10,000 over the next five years. Quebec and most of the Maritimes are also expected to feel the “sting” of an aging population, the report said.
Prince Edward Island, meanwhile, is experiencing the strongest population growth of any province in recent years. A 25-per cent increase in population over 10 years has helped to lower P.E.I.’s median age by 2.6 years, the report said.
The Conference Board’s forecast assumes the economy contracted in the second quarter of the year as tariffs and uncertainty sank manufacturing activity. The think tank predicts a modest return to growth through the rest of the year.
At the tail end of the provinces’ planning horizons, the Conference Board report sees governments reining in spending, which is expected to narrow those deficits by the end of the decade.
The federal government has announced plans to balance the operating side of its budget over the next three years. Forbes said he expects to see similar trimming by the provinces in areas such as public administration.
“Speaking broadly, of course, we are seeing provinces showing more prudence when it comes to their spending plans over the last couple of years,” he said.
Some provinces, including Saskatchewan and Alberta, are forecast to return to annual budget surpluses before 2030. The Conference Board says Canada’s Prairie provinces are in relatively secure fiscal positions, thanks in part to younger demographics and some insulation from tariffs.
Provinces like Alberta, Saskatchewan and Newfoundland and Labrador are expected to pivot their economies towards renewable energy in the years ahead, but Forbes noted that prospects for the oil and gas sector will continue to weigh heavily on the fiscal outlooks in those provinces.
Ontario is also expected to see a balanced budget by the end of the decade. The Conference Board says accelerated infrastructure spending will drive up debt in the short term but planned moderation in health care and education expenditures will support deficit elimination.
Quebec is in a “difficult position,” the report says, with the province particularly penned in by weak demographic momentum, heightened economic uncertainty and growing demand for health-care and education spending.
But the Conference Board says Quebec can find its way back to a modest surplus by 2029 if the province can deliver on spending restraint.
British Columbia also faces a steep deficit, the Conference Board says, but a slowdown in spending and rising natural gas royalties are expected to help it climb out of that fiscal hole in the coming years.
The federal government’s infrastructure agenda could also be a boon for the province, the report notes.
While New Brunswick is praised in the report for its displays of fiscal restraint in recent years, the Conference Board points to an aging population and the forestry industry’s tariff exposure as serious revenue challenges.
Nova Scotia is also expected to face challenges tied to a slowing economy, particularly as a lack of private sector investment and housing activity weigh on growth.
Forbes said that while the Conference Board’s forecast assumes trade uncertainty will diminish next year, the provinces’ fiscal pictures could deteriorate further if Canada’s tariff dispute with the United States persists.
Part of the value of the Conference Board’s exercise is that it puts all provincial budget plans through a uniform scenario, he said — unlike the various hypotheticals that underpin each individual province’s spending plan.
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